After Losing Caremark Bid, Will Express Scripts Target Medco Next?

Shares of Express Scripts (ESRX) have been on fire lately, rising 30% within months as the company tried to pry competitor Caremark Rx (CMX) from CVS (CVS). Somewhat surprisingly, ESRX shares have jumped to over $84 on news that the CVS deal was approved by shareholders, officially ending Express’ bid. With shares trading at 20 times 2007 earnings projections, the stock isn’t cheap. What might they do next to keep the share price humming along?

It appears they have three choices. They can remain independent, pair up with another pharmacy chain to match Caremark’s move, or do a vertical deal like the one they wanted to do with Caremark. In the latter case, the only big option out there is merging with Medco Health Solutions (MHS). While Medco has $5 billion more in annual sales than Caremark, a buyout would actually cost less, about $20 billion versus $27 billion. A partnership with Rite Aid (RAD) or Walgreens (WAG) would also be a good bet if ESRX feels they need to do something to remain on a level playing field with Caremark.

Given that they fought so hard to get Caremark, it would not surprise me at all if Express Scripts tried to get some sort of deal done. However, barring any accretive deal announcement, the stocks of the pharmacy benefit managers trade at 20 times current year earnings, which is at the high end of their typical trading range. As a result, they appear to be close to fully valued at current levels.

Full Disclosure: No positions in the companies mentioned at time of writing

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